The Story of Contract Law: Implementing the Bargain

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2 The Story of Contract Law: Implementing the Bargain Val Ricks Charles Weigel II Research Professor and Professor of Law South Texas College of Law Houston CALI elangdell Press 2017

3 About the Author Val Ricks has taught Contracts since His scholarship on contract law appears in the Georgetown LJ, Indiana LJ, BYU LR, George Mason LR, Baylor LR, and U. Kan. LR. He claims the original discovery that Isaac Kirksey actually made a bargain with Antillico. Professor Ricks also teaches, and writes about, business associations and other intersections of law and business. Before teaching, he clerked for Judge Charles Wiggins of the 9th Circuit and practiced transactional and appellate law in Salt Lake City. Professor Ricks received a B.A. summa cum laude in Philosophy and a J.D. summa cum laude, both from BYU. He and his bride are the parents of seven beautiful children. i

4 Notices This is the first edition of this casebook, updated April Visit for the latest version and for revision history. This work by Val Ricks is licensed and published by CALI elangdell Press under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International (CC BY- NC-SA 4.0). CALI and CALI elangdell Press reserve under copyright all rights not expressly granted by this Creative Commons license. CALI and CALI elangdell Press do not assert copyright in US Government works or other public domain material included herein. Permissions beyond the scope of this license may be available through feedback@cali.org. In brief, the terms of that license are that you may copy, distribute, and display this work, or make derivative works, so long as you give CALI elangdell Press and the author credit; you do not use this work for commercial purposes; and you distribute any works derived from this one under the same licensing terms as this. Suggested attribution format for original work: Val Ricks, The Story of Contract Law: Implementing the Bargain, CALI elangdell Press. Copyright CALI Available under a Creative Commons BY-NC-SA 4.0 License. CALI and elangdell are trademarks protected by United States federal and common law and owned by The Center for Computer-Assisted Legal Instruction. This material does not contain nor is intended to be legal advice. Users seeking legal advice should consult with a licensed attorney in their jurisdiction. The editors have endeavored to provide complete and accurate information in this book. However, CALI does not warrant that the information provided is complete and accurate. CALI disclaims all liability to any person for any loss caused by errors or omissions in this collection of information. ii

5 About CALI elangdell Press The Center for Computer-Assisted Legal Instruction (CALI ) is: a nonprofit organization with over 200 member US law schools, an innovative force pushing legal education toward change for the better. There are benefits to CALI membership for your school, firm, or organization. ELangdell is our electronic press with a mission to publish more open books for legal education. How do we define "open?" Compatibility with devices like smartphones, tablets, and e-readers; as well as print. The right for educators to remix the materials through more lenient copyright policies. The ability for educators and students to adopt the materials for free. Find available and upcoming elangdell titles at elangdell.cali.org. Show support for CALI by following us on Facebook and Twitter, and by telling your friends and colleagues where you received your free book. iii

6 Table of Contents About the Author... i Notices... ii About CALI elangdell Press... iii Introduction: Implementing the Bargain... xi I. What Is the Bargain?... 1 A. The Meaning of the Words: Interpretation or Construction? The Plain Meaning Rule or Not When to Take Evidence About Meaning... 1 CHARLES R. TIPS FAMILY TRUST, HAZEL W. TIPS FAMILY TRUST, AND CHARLES T. WATKINS v. PB COMMERCIAL LLC... 2 Caution! The Parol Evidence Rule Aside Canons of Construction and Plain Meaning PROBLEM PACIFIC GAS AND ELECTRIC COMPANY v. G. W. THOMAS DRAYAGE & RIGGING COMPANY, INC Substantive Presumptions MONTGOMERY COUNTY HOSPITAL DISTRICT f/d/b/a Medical Center Hospital v. Valarie BROWN Usage, Custom, and Prior Practice Herman FISHER v. CONGREGATION B NAI YITZHOK Uniform Commercial Code RALPH'S DISTRIBUTING CO. v. AMF, INC LINCOLN BIG THREE, INC. v. W.G. Bill THOMAS FRIGALIMENT IMPORTING CO., Ltd. v. B.N.S. INTERNATIONAL SALES CORP B. Writing the Promise: What Effect? Mistake in Transmission GREAT-WEST INVESTORS LP v. THOMAS H. LEE PARTNERS, L.P. et al Parol Evidence COLLIERS, DOW AND CONDON, INC. v. Leonard J. SCHWARTZ et al Bennie D. HERRING v. Hubert M. PRESTWOOD, Jr., et al Uniform Commercial Code iv

7 Alvin SNYDER, Morris Sugarman, Herbert Thaler and Harold A. Crone, Inc. and T/A Twin Lakes Partnership v. HERBERT GREENBAUM AND ASSOCS., INC PROBLEM PROBLEM Luther WILLIAMS, Jr. v. JOHNSON RIGGS BANK, N.A. v. Edward J. HARRIS, Jr., et al C. Implied Obligations Duty of Cooperation PATTERSON v. MEYERHOFER PROBLEM Good Faith DESERT HERITAGE LIMITED PARTNERSHIP v. CITY OF TUCSON Uniform Commercial Code 1-201(b)(20), NEUMILLER FARMS, INC. v. Jonah D. CORNETT et al Paul REID v. KEY BANK OF SOUTHERN MAINE, INC Uniform Commercial Code ATLANTIC TRACK & TURNOUT CO. v. PERINI CORP LARESE v. CREAMLAND DAIRIES, INC D. Express Conditions PREFERRED MORTGAGE BROKERS, INC. v. Hervin BYFIELD OPPENHEIMER & CO., INC. v. OPPENHEIM, APPEL, DIXON & CO Aside Waiver R. CONRAD MOORE & ASSOCS., INC. v. LERMA Note: Retraction of Waivers PROBLEM PROBLEM E. Implied in Law or Constructive Conditions Who Performs First If the Parties Did Not Say NICHOLAS v. RAYNBRED KINGSTON v. PRESTON GOODISON v. NUNN Jeffrey A. PITTMAN v. Lily V. CANHAM v

8 Thomas R. MOORE v. Martin KOPEL Mitigating Doctrines a. Substantial Performance JACOB & YOUNGS, INC. v. KENT TOMPKINS et al. v. DUDLEY PROBLEM PROBLEM b. Divisibility Marcus LOWY v. UNITED PACIFIC INS. CO NEW ERA HOMES CORP. v. FORSTER c. Equitable Relief from Forfeiture William LEWIS v. PREMIUM INVESTMENT CORP PROBLEM d. Unjust Enrichment Britton v. Turner Ellis SATCHELL v. Derrick V. VAN BRODE e. Anticipatory Repudiation Hochster v. De La Tour H.B. TAYLOR v. Elizabeth G. JOHNSTON Uniform Commercial Code 2-609, 2-610, 2-703(a), 2-705, 2-711(1) AMF, INC. v. McDONALD'S CORP Roger DIAMOND v. UNIVERSITY OF SOUTHERN CALIFORNIA POLLACK v. POLLACK f. Perfect Tender Uniform Commercial Code D.P. Technology Corp. v. Sherwood Tool, Inc Uniform Commercial Code 2-508, 2-606, Wayne TUCKER and Elna Tucker v. AQUA YACHT HARBOR CORP Uniform Commercial Code & comments Daniel HUBBARD v. UTZ QUALITY FOODS, INC II. Subsequent Events A. Impracticability of Performance vi

9 Waddy v. Riggleman George SEITZ v. MARK-O-LITE SIGN CONTRACTORS, INC Uniform Commercial Code MAPLE FARMS, INC. v. CITY SCHOOL DISTRICT OF THE CITY OF ELMIRA, NEW YORK B. Frustration of Purpose PEOPLESOFT U.S.A., INC. v. SOFTECK, INC PIEPER, INC. v. LAND O LAKES FARMLAND FEED, LLC CHASE PRECAST CORP. v. JOHN J. PAONESSA CO., INC C. Failure of Consideration SCHAUFELBERGER v. MISTER SOFTEE JONES v. FULLER-GARVEY CORPORATION GODWIN v. COOPER D. Risk of Loss Uniform Commercial Code 2-509, PROBLEM MCKNIGHT v. BELLAMY III. Remedies A. Rescission NEW YORK LIFE INS. CO. v. SISSON B. Damages Introduction POTTER v. OSTER SULLIVAN v. O CONNOR DEITSCH v. THE MUSIC COMPANY Expectation AMERICAN STANDARD, INC. v. SCHECTMAN RIVERS v. DEANE Reliance BECO CONSTRUCTION COMPANY, INC. v. HARPER CONTRACTING, INC Joseph TOSCANO v. GREENE MUSIC Note: Promissory Estoppel and Expectation Damages vii

10 4. Restitution David O. JOHNSON v. John W. BOVEE and Alice M. Bovee C. Limiting Doctrines Speculation COLUMBIA PARK GOLF COURSE, INC. v. CITY OF KENNEWICK Foreseeability HADLEY v. BAXENDALE Mitigation ZAYRE CORP. v. CREECH PROBLEM SEARS, ROEBUCK AND CO., INC. v. Theodore GRANT Punitive Damages WERNER, ZAROFF, SLOTNICK, STERN & ASKENAZY v. Donald R. LEWIS Liquidated Damages BOWBELLS PUBLIC SCHOOL DISTRICT NO. 14 v. Marcia WALKER Agreements to Limit Damages Joyce UNDERWOOD v. NATIONAL ALARM SERVICES, INC D. Specific Performance Richard A. ALBA et al. v. Jean-Claude KAUFMANN NORTHERN INDIANA PUBLIC SERVICE CO. v. CARBON CTY. COAL CO BEVERLY GLEN MUSIC, INC. v. WARNER COMMUNICATIONS, INC E. Agreements to Arbitrate BUCKEYE CHECK CASHING, INC. v. CARDEGNA AT&T MOBILITY LLC v. CONCEPTION et ux F. Remedies in UCC Article Two Buyer s Damages Uniform Commercial Code 1-305, 2-711, 2-712, 2-713, 2-714, 2-715, PROBLEM PROBLEM PROBLEM viii

11 TROXLER ELECTRONICS LABORATORIES, INC. v. SOLITRON DEVICES, INC PROBLEM Seller s Damages Uniform Commercial Code 2-703, 2-704, 2-705, 2-706, 2-708, 2-709, 2-710, PROBLEM NOBS CHEMICAL, U.S.A., INC. and Calmon-Hill Trading Corp. v. KOPPERS CO., INC Liquidated Damages TRUCK RENT-A-CENTER, INC. v. PURITAN FARMS 2 nd, INC IV. Third-Party Rights and Obligations A. Assignment FITZROY v. CAVE Uniform Commercial Code The EVENING NEWS ASSOCIATION v. Gordon PETERSON Stephen A. DILLMAN v. TOWN OF HOOKSET CONTINENTAL PURCHASING CO., INC. v. VAN RAALTE CO., INC Uniform Commercial Code 9-406(a)-(d) Uniform Commercial Code 9-403(b), 9-404(a); 16 C.F.R PROBLEM Marco RUMBIN v. UTICA MUT. INS. CO B. Delegation SALLY BEAUTY COMPANY, INC. v. NEXXUS PRODUCTS COMPANY, INC Howard M. BERG and Sandra Berg v. LIBERTY FEDERAL SAVINGS AND LOAN ASS N C. Third-Party Beneficiaries James C. BAIN v. John GILLESPIE SIMON v. ZIPPERSTEIN PROBLEM PROBLEM PROBLEM PROBLEM ix

12 PROBLEM PROBLEM x

13 Introduction: Implementing the Bargain Many judges and scholars of contract law focus their attention on the parties assent, on agreement. But the doctrine of contract law itself focuses on the enforcement of a promise, one promise at a time. The central organizing rule for enforcement the idea that ties the doctrines of contract law together is that the promise must be part of a fair exchange. In formation doctrine, courts ensure an exchange by requiring consideration (which itself requires assent) but police the fairness of the exchange through the doctrines of mistake, duress, misrepresentation, undue influence, and unconscionability. Separating contract law into doctrines of formation, interpretation, conditions, subsequently occurring events, remedies, and third-party interests, as I do in this book, distracts to some extent from discussion of the primary goal of contract doctrine, which is to enforce fair exchange. In the cases studied in this volume, courts continue to discern and police the bargain of the parties. Of course, the meaning of fair will depend on the goals of the court; contract doctrine, like most legal doctrine, lies at the level of generality (not too general, not too specific) that allows the plurality of views necessary for a legal system comprising diverse and strong-willed individuals to function. Nevertheless, if you are discerning, you should expect and be able to find in these materials arguments for and against fairness based on autonomy, welfare, and other moral claims, just as you did for the doctrines of formation in Volume I. In the end, I hope you will see, notwithstanding its occasional missteps, what a remarkable achievement contract law is and how it meshes with the culture, and encourages the success, of a mostly honest and very ambitious people whose cooperation together is vital to their flourishing. Val Ricks xi

14 I. What Is the Bargain? Promises and contracts are made up of words. The words meaning might be clear or unclear. The words might be written or oral. They might be gathered in one place or scattered among many documents. They might even be placed in a document by mistake. The words might be words of promise, but contracts often also contain conditions, representations, statements of factual background, and other terms. Sometimes courts by law read into or imply in contracts terms that the parties were not aware they needed but that are suggested by the parties bargain. In this first section of the casebook, we examine all the ways by which courts determine the content of the bargain. We will examine how a court determines what words in a contract mean (Subsection A), how the court decides which words are included in the contract (Subsection B), what other obligations are implied by the parties bargain (Subsection C), what courts do with language of condition (Subsection D), and how courts decide who should perform first if the parties have not said (Subsection E). A. The Meaning of the Words: Interpretation or Construction? After a contract forms, any attempt to enforce it requires the parties and the court to know what the words of the contract mean. As you might expect, the meaning of contractual words is sometimes not obvious. What is a court to do when the parties have agreed to words the meaning of which is unclear? 1. The Plain Meaning Rule or Not When to Take Evidence About Meaning The following case, Tips, illustrates what the law calls the plain meaning rule. This case involves a negotiable instrument, namely, a promissory note. Negotiable means the instrument can be signed on the back by the promisee and traded (often at near face value) to someone else, like a check when it is cashed or deposited at a bank. Negotiable instruments are in a standard form that is supposed to be easily tradable, almost like cash. You can perhaps see why we would not want the terms of a negotiable instrument to be endlessly debatable. But this case also involved non-negotiable contracts, namely, a mortgage and a guaranty. These are just ordinary contracts. They cannot be negotiated (though they can be assigned). Should the rule in this case apply to all contracts? Or should we call some witnesses? 1

15 CHARLES R. TIPS FAMILY TRUST, HAZEL W. TIPS FAMILY TRUST, AND CHARLES T. WATKINS v. PB COMMERCIAL LLC Tex. App. (2015), 459 S.W.3d 147 MICHAEL MASSENGALE, Justice. OPINION [ 1] The parties to this appeal entered into a residential loan agreement and guaranty for the principal amount of "ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS." The loan documentation thus identified the amount of the loan in two different ways, with one number favoring the borrower one million seven thousand written out in words and a larger number favoring the bank $1,700,000 set out in numerals. The bank alleged a default on the loan, and litigation ensued. The parties filed competing motions for summary judgment, and the trial court rendered a final summary judgment in favor of the bank. [ 2] The borrowers and their guarantor appeal, arguing that the written words control the meaning of the document and that the note has been satisfied in full. Applying the wellsettled interpretive rule that "words prevail over numbers" in the event of such a discrepancy, we reverse in part, affirm in part, and remand the case to the trial court for further proceedings. Background [ 3] In 2007, the Charles R. Tips Family Trust and the Hazel W. Tips Family Trust executed a "Balloon Real Estate Note" in favor of Patriot Bank. The note was secured by real property in Harris County pursuant to a "Deed of Trust and Security Agreement." The same day, Charles Watkins, a trustee of both trusts, executed a "Guaranty Agreement" in favor of Patriot Bank, obligating himself to personally pay the loan if the trusts defaulted on their payment obligations. The note, the security agreement, and the guaranty agreement all described the principal amount of the loan as follows: ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS This language appears five times in the three documents, in exactly the same form each time, and no other language in the documents describes the amount of the loan. [ 4] Before the note matured, the trusts made payments totaling $595,586. Neither the trusts nor Watkins made any further payments, and Patriot Bank initiated this action to collect the balance due on the note as well as unpaid interest. PB Commercial, LLC ("PBC") subsequently acquired the note and sold the property securing it at auction for $874,125. PBC was then substituted as plaintiff. 2

16 [ 5] PBC filed a motion for traditional summary judgment, seeking recovery on both the note and the guaranty agreement. PBC argued that the original principal amount of the loan was $1,700,000, and on that basis it calculated a deficiency under the note and guaranty agreement of $815, after application of all payments and the proceeds from the foreclosure sale. PBC attached the note, security agreement, and guaranty agreement to its motion, but it made no mention of the conflict between the printed words and numerals. It also attached a payment history showing how Patriot Bank applied payments against the loan, treating the principal amount as $1,700,000. [ 6] The trusts and Watkins responded by amending their answer, filing a counterclaim, responding to PBC's motion for summary judgment, and filing a cross-motion for summary judgment. In these filings, the trusts and Watkins argued that the original principal amount of the loan under the note and guaranty agreement was $1,007,000. They argued that both documents are negotiable instruments governed by Section of the Texas Business and Commerce Code, which provides: "If an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers." TEX. BUS. & COM. CODE According to the trusts and Watkins, applying past payments and the foreclosure sale proceeds to the lower amount leads to the conclusion that the note was fully satisfied after the foreclosure sale and, in fact, PBC has collected a surplus of $189,111 beyond the amount to which it was entitled. [ 7] The amended answer included a counterclaim, which sought a declaration that: (a) the... Note... was for the original principal amount of $1,007,000; and not $1,700,000; (b) the Note has been fully paid and satisfied as a result of the payments made thereon prior to the Trusts' alleged default, and the amount collected by Plaintiff through the post-default foreclosure upon and sale of the real property pledged as security under the Note; (c) Watkins is relieved of any further obligation under the Guaranty; and (d) [PBC] is retaining and holding money obtained through the foreclosure sale that is in excess of the amount necessary to fully pay and satisfy the amounts due under the Note. The counterclaim also sought unspecified statutory damages under the Business and Commerce Code and an award of attorney's fees. Notably, however, the cross-motion for summary judgment requested only that the trial court deny PBC's motion and award the trusts the alleged surplus resulting from the foreclosure sale. The cross-motion did not mention the claims for attorney's fees or statutory damages, nor did it provide any legal basis or evidentiary support for those claims. [ 8] After a pair of hearings, the trial court granted PBC's motion and denied the crossmotion filed by the trusts and Watkins. The trial court's final judgment awarded PBC damages in the amount of $815,214.50, prejudgment and postjudgment interest, court costs, and trial and appellate attorney's fees. The trusts and Watkins appeal. 3

17 Analysis [ 9] This appeal presents one issue: whether the amount of the loan must be determined from the printed words in the note or from the entire context of the transaction, including evidence of the amount of money that Patriot Bank actually made available to the borrowers. Once we have determined the amount of the loan, the trusts and Watkins ask us to reverse the trial court's judgment as to PBC's claims and render judgment in their favor or remand for further proceedings. [ 10] This court reviews an order granting or denying a motion for summary judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm'n of Tex., 253 S.W.3d 184, 192 (Tex. 2007). When both parties moved for summary judgment and the trial court granted one and denied the other, we "review the summary judgment evidence presented by each party, determine all questions presented, and render judgment as the trial court should have rendered." Id. We may affirm the judgment that the trial court rendered or reverse and render the judgment that the trial court should have rendered. See FM Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000). [ 11] The trusts and Watkins characterize the "Balloon Real Estate Note" as a promissory note * and as a negotiable instrument, and PBC does not dispute this characterization. To recover on a promissory note on which the borrower has defaulted, PBC was required to prove that (1) the note existed, (2) the maker or makers of the note signed it, (3) it was the legal owner and holder of the note, and (4) a certain balance was due and owing on the note. See, e.g., Wells Fargo Bank, N.A. v. Ballestas, 355 S.W.3d 187, 191 (Tex. App.- Houston [1st Dist.] 2011, no pet.); Clark v. Dedina, 658 S.W.2d 293, 295 (Tex. App.- Houston [1st Dist.] 1983, writ dism'd). [ 12] To recover on the guaranty agreement, PBC was required to prove "the existence and ownership of the guaranty contract, the terms of the underlying contract by the holder, the occurrence of the conditions upon which liability is based, and the failure or refusal to perform by the guarantor." McShaffry v. Amegy Bank Nat'l Ass'n, 332 S.W.3d 493, 496 (Tex. App. Houston [1st Dist.] 2009, no pet.); see also Wasserberg v. Flooring Servs. of Tex., LLC, 376 S.W.3d 202, 205 (Tex. App. Houston [14th Dist.] 2012, no pet.). [ 13] To recover the amount remaining due under the note and guaranty agreement after the foreclosure sale, PBC was required to prove "(1) the amount due on the note at the time of foreclosure, (2) that proper notice of acceleration had been given, (3) that a valid foreclosure sale was made and (4) that [PBC] has given credit to the [debtors] for the amount received at the trustee's sale and any other legitimate credits." Carruth Mortg. Corp. v. Ford, 630 S.W.2d 897, 899 (Tex. App. Houston [1st Dist.] 1982, no writ); see also * A "promissory note" is: "An unconditional written promise, signed by the maker, to pay absolutely and in any event a certain sum of money either to, or to the order of, the bearer or a designated person." BLACK'S LAW DICTIONARY 1226 (10th ed. 2014). See TEX. BUS. & COM. CODE 3.104(a)-(d). 4

18 Collins v. Bayview Loan Servicing, LLC, 416 S.W.3d 682, 686 (Tex. App. Houston [14th Dist.] 2013, no pet.). When a party holding a security interest recovers more than the amount of the obligation, it must pay out any amounts due to certain third parties, then account for and pay to the debtor the remaining surplus. TEX. BUS. & COM. CODE 9.615(d)(1); see also id (a), (c). [ 14] If a written instrument is worded in such a way that it can be given a definite or certain legal meaning, then the contract may be construed as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). "An unambiguous contract will be enforced as written, and parol evidence will not be received for the purpose of creating an ambiguity or to give the contract a meaning different from that which its language imports." David J. Sacks, P.C. v. Haden, 266 S.W.3d 447, 450 (Tex. 2008); see also Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (per curiam). [ 15] Whether a contract is ambiguous is a question of law, which we review de novo. Coker, 650 S.W.2d at 394. When a contract contains an ambiguity, summary judgment is precluded because interpretation of the contract becomes a fact issue. Id. (citing Harris v. Rowe, 593 S.W.2d 303, 306 (Tex. 1979)). [ 16] A simple lack of clarity or disagreement between parties does not render a term ambiguous. See DeWitt Cnty. Elec. Coop., Inc. v. Parks, 1 S.W.3d 96, 100 (Tex. 1999). Rather, "[a]n ambiguity arises only after the application of established rules of construction leaves an agreement susceptible to more than one meaning." Id. "[F]or an ambiguity to exist, both potential meanings must be reasonable." Id. "Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered." Coker, 650 S.W.2d at 394. If the contract is ambiguous as a matter of law, only then is parol evidence of the parties' interpretation of the contract admissible. Pitts & Collard, L.L.P. v. Schechter, 369 S.W.3d 301, 313 (Tex. App. Houston [1st Dist.] 2011, no pet.). [ 17] Texas law anticipates internal contradictions in both negotiable and non-negotiable instruments and provides for the resolution of such contradictions. Under the Uniform Commercial Code, which governs negotiable instruments such as the Note, "[i]f an instrument contains contradictory terms, typewritten terms prevail over printed terms, handwritten terms prevail over both, and words prevail over numbers." TEX. BUS. & COM. CODE 3.114; see also McNeese v. State, 596 S.W.2d 906, 907 (Tex. Crim. App. [Panel Op.] 1980); Taylor v. State, 672 S.W.2d 262, 264 (Tex. App. Waco 1984, no writ). "It is well settled that unambiguous written words prevail over arithmetic numbers in promissory notes." First State Bank v. Keilman, 851 S.W.2d 914, 920 (Tex. App. Austin 1993, writ denied); see also Duvall v. Clark, 158 S.W.2d 565, 567 (Tex. Civ. App. Waco 1941, writ ref'd w.o.m.) ("It is elementary that the written words of an instrument control and prevail over figures."). This rule derives from the principle that "writing words more likely represents the parties' true intentions than writing numbers." 6B LARY LAWRENCE, ANDERSON ON THE UNIFORM COMMERCIAL CODE 3-114:5R 5

19 (3d ed. rev'd 2003); see also 6 WILLIAM D. HAWKLAND & LARY LAWRENCE, HAWKLAND & LAWRENCE UCC SERIES 3.114:1 (1999) ("Words are preferred because writing words more likely effects the parties' true intentions than writing numbers."); France v. Ford Motor Credit Co., 913 S.W.2d 770, 772 (Ark. 1996) (noting application of identical statute when individual wrote both "8,000.00" and "Eight dollars and 00/100" on check to creditor, resulting in payment of eight dollars). The same interpretive rule applies to non-negotiable instruments. See Guthrie v. Nat'l Homes Corp., 394 S.W.2d 494, 495 (Tex. 1965). I. Interpretation of contractual language A. Unambiguity of loan amount [ 18] We first must examine whether the loan agreements are ambiguous. If so, then summary judgment was improper for that reason. Coker, 650 S.W.2d at 394; Harris, 593 S.W.2d at 306; Simpson v. GEICO Gen. Ins. Co., 907 S.W.2d 942, 945 (Tex. App. Houston [1st Dist.] 1995, no writ). [ 19] The Note, Security Agreement, and Guaranty Agreement each describe the original amount of the loan obligation as "ONE MILLION SEVEN THOUSAND AND NO/100 ($1,700,000.00) DOLLARS." The phrase "one million seven thousand and no/100 dollars" has a plain, unambiguous meaning, namely the sum of $1,007, Thus, the words and the numerals in the loan agreements are in conflict, differing by $693,000. This impact is magnified by the fact that the actual amount of the loan affects the application of payments, resulting in different sums of interest due in each scenario. [ 20] In Guthrie v. National Homes Corp., 394 S.W.2d 494 (Tex. 1965), the Supreme Court of Texas considered a similar case, in which the instrument in question stated that the obligor would pay "$5,780.00," which was written out as "Five Thousand Eighty and 00/100 Dollars." Guthrie, 394 S.W.2d at 495. The Court held that the words "Five Thousand Eighty and 00/100 Dollars" were unambiguous and controlled the numerals. Id. at A jury had returned a verdict that, because $5,000 had been paid on the note, the obligor still owed $780. Id. at 494. In light of the unambiguous written words of the instrument, however, there was no fact issue regarding the original amount of the loan for the jury to consider, and the Court reduced the award to $80 to match the words of the instrument. Id. at 496. The Court recognized that the rule favoring words over numerals already applied to negotiable instruments such as promissory notes and held that the same rule applies to non-negotiable instruments. Id. at [ 21] Similarly, in First State Bank v. Keilman, 851 S.W.2d 914 (Tex. App. Austin 1993, writ denied), the parties' agreement stated that interest would be paid at the "prime rate... plus Two percent (12.5%)," but "12.5%" was crossed out and the number "2%" written in. First State Bank, 851 S.W.2d at 920. The court of appeals explained that "[i]t is well settled that unambiguous written words prevail over arithmetic numbers in promissory 6

20 notes." Id. Thus, even though handwritten or typed text ordinarily prevails over printed terms in an instrument, the alteration had no effect, as the written words would still control over the interpretation of the arithmetic numbers "12.5%" and "2%." Id.; see also Duvall, 158 S.W.2d at 567 (handwritten change from "$900.00" to "$930.00" was immaterial because written words setting payment at six percent of $15,000 controlled and were not altered). [ 22] Under the UCC and Guthrie, the rule that the written words control over numerals applies to all of the documents at issue in this dispute, both negotiable and non-negotiable instruments. TEX. BUS. & COM. CODE 3.114; Guthrie, 394 S.W.2d at It does not matter that the discrepancy between the words and numbers here is a large one. Neither Section nor Texas case law makes a distinction on the basis of the size of the obligation or the significance of the conflict in terms. Indeed, at least one court has applied the logic of Guthrie in holding that words controlled over numbers when a discrepancy was even larger relative to the transaction size than it is here. In In re Regency Chevrolet, Inc., 122 B.R. 60 (Bankr. S.D. Tex. 1990) (mem. op.), the bankruptcy court for the Southern District of Texas held that the terms "Seventeen Thousand Five Hundred Dollars ($10,000.00)" and "Seventeen Thousand Five Hundred Dollars ($14,000.00)" in two different leases created two monthly obligations of $17, each. 122 B.R. at (citing Guthrie, 394 S.W.2d at 494). [ 23] PBC argues that this case presents a unique circumstance in that the omission of a single word transforms "one million seven hundred thousand" into "one million seven thousand." If the former phrase were modified in any other way, according to PBC, we would be faced with either an ambiguous term or an unambiguous but absurd one. For example, PBC posits a scenario in which a scrivener's error rendered the phrase as "one seven hundred thousand," omitting the word "million." According to PBC, such an amount would be ambiguous, and the court would have to refer to the numerals and extrinsic evidence to resolve the ambiguity. But this hypothetical scenario has no bearing on this case because there is no ambiguity in the text here. Indeed, in the scenario described by PBC, one could not even say that the terms contradict each other within the meaning of Section 3.114, as the meaning of one of the potentially conflicting terms would be ambiguous. [ 24] Alternatively, PBC suggests a scenario in which another scrivener's error replaced "million" with "billion," resulting in "one billion seven hundred thousand." This, PBC says, would result in the borrowers clamoring for relief and asking this court to consider evidence extrinsic to the contract. That may be, and the possibility of such an error demands careful review of proposed written agreements. But that is no basis upon which we may disregard well-settled and binding statutory and case law. We need not and do not express any opinion on what legal or equitable remedies the parties might have in such a hypothetical scenario. On the appellate record before us, the only issue is what the terms of the written agreements mean as a matter of law. Neither party sought an equitable reformation of the loan in the trial court, so no issue of equitable relief has been presented 7

21 in this appeal. The scenario proposed by PBC thus has no bearing on how we must apply the law to the record before us. [ 25] Here, the words "one million seven thousand" control over the numerals "$1,700,000" to set the amount of the promissory note and guaranty obligations. B. Irrelevance of extrinsic evidence [ 26] PBC also argues that the trial court properly considered evidence before it that the borrowers received $1,700,000 from Patriot Bank. But a court may not consider extrinsic evidence about a contract's meaning unless the contract is ambiguous. PBC does not contend that the documents are ambiguous; any material ambiguity in the contracts would have made summary judgment for PBC improper for that reason alone. Coker, 650 S.W.2d at 394; Harris, 593 S.W.2d at 306; Simpson, 907 S.W.2d at 945. [ 27] A document is ambiguous only if it is susceptible to more than one reasonable interpretation after application of all relevant rules of construction. DeWitt Cnty. Elec. Coop., 1 S.W.3d at 100. Only one interpretation of the language in question is possible in light of controlling law. [ 28] The agreements unambiguously set the amounts of the promissory note and guaranty obligations at $1,007, each. Because the amount of principal set forth in the Note and Guaranty Agreement is not ambiguous, for purposes of interpreting the documents as a matter of law, neither the trial court nor this court may consider extrinsic evidence such as the amount of money that actually changed hands amongst the parties, and such evidence could not have supported the trial court's judgment. Pitts & Collard, 369 S.W.3d at 313. * * * * [ 29] To recover on the Note, PBC was required to prove that a certain balance was due and owing on the Note. Clark, 658 S.W.2d at 295. It has failed to do so and did not even address the correct amount of the loan in its motion for summary judgment. Further, to recover on the alleged deficiency, PBC was required to prove "the amount due on the note at the time of foreclosure." Carruth Mortg. Corp., 630 S.W.2d at 899. This it has also failed to do. Instead, PBC's position depends on extrinsic evidence that the amount due should be calculated based on an amount other than the amount fixed by the Note. Because the trial court could not have considered such evidence, we hold that PBC was not entitled to summary judgment on its claims for damages, interest, costs, or attorney's fees stemming from the trusts' default under the Note. [ 30] To recover on the Guaranty Agreement, PBC was required to prove "the terms of the underlying contract by the holder." McShaffry, 332 S.W.3d at 496. Again, because PBC's claims depended on a misinterpretation of the unambiguous language of the Note, PBC has failed to demonstrate that it was entitled to summary judgment against Watkins under the Guaranty Agreement. 8

22 [ 31] Because PBC did not establish each of the elements of any of its causes of action, it was not entitled to summary judgment. We will therefore reverse the trial court's judgment insofar as it granted judgment in favor of PBC on its affirmative claims. B. Motion for summary judgment filed by the trusts and Watkins [ 32] Our inquiry does not stop here, however, as the trusts and Watkins argue that their motion for summary judgment was wrongly denied. When the parties file competing motions for summary judgment, on appeal we "review both sides' summary judgment evidence," "determine all questions presented," and "render the judgment that the trial court should have rendered." FM Props., 22 S.W.3d at 872. We must therefore determine whether the trusts and Watkins were entitled to summary judgment. [ 33] In their motion, the trusts and Watkins argued that the amount of the Note was $1,007,000, resulting in the Note having been completely satisfied by the time that the lawsuit was filed. They argue that they made payments of $595,586, which, applied to the principal of $1,007,000, should have resulted in application of $273,600 to interest and $321,986 to principal. The foreclosure sale yielded an additional $874,125. Adding these numbers together yields total payments of $1,196,111. Based on a loan amount of $1,007,000, the trusts and Watkins conclude that PBC has recovered more than was due and that it now owes them $189,111. [ 34] The trusts and Watkins do not provide any explanation or evidentiary support for their calculations, either in their motion or in their briefs to this court. In fact, their motion did not attach any evidence whatsoever. Neither the evidence in the record nor the parties' briefs provides any guidance for how the calculations are to be performed given the correct loan amount. Rather, the record contains only evidence of how the bank applied interest against the incorrect amount; when using the correct amount, only the results of the parties' respective calculations are given. [ 35] The record before us does not establish the amount of any surplus or that such a surplus exists. We have already held that the original amount of the loan as specified in the Note, Security Agreement, and Guaranty Agreement was $1,007,000, not $1,700,000, and we thus hold that the trusts and Watkins have established that they were entitled to summary judgment on their first request for declaratory relief, namely a legal declaration that "the... Note... was for the original principal amount of $1,007,000; and not $1,700,000." The trial court erred in denying this relief on the basis of the pleadings and record before it. Because the record provides no definitive basis for calculating the amount due at the time of the foreclosure sale or at the date of the trial court's judgment, however, the trial court did not err in denying the other declaratory relief requested. We note that even if the trusts and Watkins had entirely prevailed on their summary judgment motion in the trial court, the rules of civil procedure would have permitted PBC an opportunity to assert the equitable claims that it referenced for the first time in its appellate briefing. See 9

23 TEX. R. CIV. P. 63. Accordingly, we will remand the case to the trial court for further proceedings consistent with this opinion. Conclusion [ 36] The amount due under the Note, Security Agreement, and Guaranty Agreement was determined by the written words therein, not the numerals. The judgment of the trial court regarding PBC's claims for affirmative relief is therefore reversed. We also reverse the judgment to the extent that it denied summary judgment to the trusts and Watkins on their first claim for declaratory relief. Further, because the trusts and Watkins were entitled to judgment on that claim, we render judgment that the principal amount of the loan as specified in the Note was $1,007, We remand the case to the trial court for further proceedings consistent with this opinion. Questions: 1. What sorts of policy concerns could possibly justify this holding? Doesn t the court care what actually happened? Is this case s result consistent with the parties intentions at the time of contract formation? Either party s intentions? 2. The rule the court follows appears in UCC Article 3 and by its terms applies only to negotiable instruments. An instrument is negotiable when it (1) is an unconditional promise or order to pay a fixed amount of money, (2) is payable to bearer or order when issued or when it comes into possession of a subsequent holder, (3) is payable on demand or at a definite time, and (4) does not contain any other promises or instruction that the person paying the money must do. UCC A common bank check is a negotiable instrument. Finance notes, such as for cars, or equipment, are often also negotiable. Why is the rule the court follows particularly appropriate for a negotiable instrument? 3. The court calls the other contracts at issue in this case non-negotiable instruments. E.g., 17. The UCC actually defines instrument : Instrument means a negotiable instrument. UCC The Texas code includes this definition. Does that undercut Tips? 4. The instrument at issue in the Guthrie case was a non-negotiable note. Same thing in Keilman and Duvall. Should that distinguish them from this case? Why is a guaranty not a negotiable instrument? How is a guaranty different than a note? 10

24 5. The word parol is an older Law French term meaning words or speech. J.H. Baker, Manual of Law French 165 (1990). Its meaning has expanded to include something like anything that is not written in the document at issue. This might be spoken words but it also might be writing in other documents not formally connected to the contract or other actions of the parties. A letter written between the parties during negotiations, for instance, would be parol as the word is often used. 6. What should be your advice to drafters after reading this case? 7. Is the creditor out of luck, here? Should it have asked for another form of relief? Caution! The Parol Evidence Rule. Most of the cases in this section mention a rule of contract law called the parol evidence rule. This is a different rule than the plain meaning rule, though some courts and commentators confusingly use the parol evidence rule label for both the parol evidence rule and the plain meaning rule. The two rules have very different functions within the law. Be careful not to confuse them. The parol evidence rule applies when the parties have chosen to put their contract in a writing. Putting a contract in writing is a significant act, and the parol evidence rule takes account of that significance. The rule attaches great importance to this document. The basic terms of the parol evidence rule are simply stated: If the parties have agreed that a written document will be the final expression of their agreement, then the document cannot be contradicted by evidence of (or from) any prior or contemporaneous promise or agreement. If the parties have agreed that the document is complete, then it cannot be supplemented by any prior or contemporaneous promise or agreement. Though the parol evidence rule employs the word parol, consistently with the expanded meaning of that word the parol evidence rule applies to any (and all) prior or contemporaneous promise or agreement, including other written ones, that contradict or supplement the specified written contract. In this usage, the document designated by the parties controls, and everything else is just words. The the parol evidence rule polices the content of a contract by saying which words are included in it. The parol evidence rule is not about the meaning of those words; that is determined by the plain meaning rule and the other rules you learn in this section. The parol evidence rule is about what words are included in the contract at all, and the parol evidence rule applies any time the parties have put their agreement in writing. The parol evidence rule is harder to apply than to state, for various reasons we will talk about in Part I.B, which covers the rule. However, you should know that courts often refer explicitly or implicitly to the parol evidence rule when they discuss the plain meaning rule, the one that governed the Tips case. Courts also use language that sometimes makes 11

25 you think they may be referring to both rules (Tips 14, for instance); you will have to determine from context which one they are applying (in Tips, I think it s plain meaning). Many of the policy concerns that animate the plain meaning rule also support the parol evidence rule. Sometimes the courts even mix the two rules together. In fact, judicial statements about the parol evidence rule are famously confusing. Let the language above describing the parol evidence rule be your guide, put yourself in information-gathering mode only on the parol evidence rule for now, and we will try to sort it out when we get to it. For now, remember this: The parol evidence rule does not address the meaning of words; it is not about ambiguity and what language means. The parol evidence rule is irrelevant to those issues. Aside Canons of Construction and Plain Meaning Some rules of interpretation seem to be pretty universal. For example, rules written down by Rabbi Yishmael around 200 C.E. for interpreting Jewish Law indicate that a matter is elucidated from its context. As an example, one of the Ten Commandments is thou shalt not steal. This is considered a capital offense in Jewish Law because it falls between two other capital offenses thou shalt not kill and thou shalt not commit adultery. Because only one kind of theft in Jewish law could be a capital offense kidnapping a fellow Jew and treating him as a slave Jewish legal scholars conclude that thou shalt not steal in the Ten Commandments refers only to kidnapping. * Which of the following maxims of contract interpretation is most like a matter is elucidated from its context? Expressio unius exclusio alterius est: The expression of one is the exclusion of the other. In Ulmer v. Harsco Corp., the court considered whether severance payments had to be paid to employees who were terminated as part of the sale of the business. The employer s Severance Pay Policy or Plan stated when severance would be paid and specified exceptions. The Court reasoned: In sum, while the language of the Plan is general, it is not ambiguous on its face. It clearly states that "where employment is terminated" the language Harsco used to describe its action in its letter to employees severance would be paid. Jt. App. at 449. Since the Plan gives several exemptions to this rule "death, disability, retirement and military leave," Jt. App. at 450 one may assume under the principle of expressio unius exclusio alterius that other exemptions such as going concern sales were not intended. Ulmer v. Harsco Corp., 884 F.2d 98, (3d Cir. 1989). For this and other reasons, the court reversed summary judgment in favor of the employer. Noscitur a sociis: It is known from its associates. Under the doctrine of noscitur a sociis, "the meaning of a word or phrase may be ascertained by reference to the meaning of other * Thanks to Michael Rothenberg, STCLH Class of 02, for the translation and explanation. 12

26 words and phrases with which it is associated. Wolfe v. Forbes, 217 S.E.2d 899, 900 (W. Va. 1975). United States Supreme Court Justice Antonin Scalia discussed the meaning of this rule by illustration: "If you tell me, 'I took the boat out on the bay,' I understand 'bay' to mean one thing; if you tell me, 'I put the saddle on the bay,' I understand it to mean something else." A Matter of Interpretation, (Princeton, New Jersey: Princeton University Press, 1997), p 26. G.C. Timmis & Co. v. Guardian Alarm Co., 2003 WL (Mich., June 18, 2003) (Young, J. dissenting). Ejusdem generis: In applying this maxim, meaning is given to a general term in the following manner: [T]he general term is restricted to include only things of the same kind, class, character, or nature as those specifically enumerated"; that is, because the listed items have a commonality, the general term is taken as sharing it. In A Matter of Interpretation (Princeton, New Jersey: Princeton University Press, 1997), p. 26, United States Supreme Court Justice Antonin Scalia explains that the ejusdem generis canon of statutory construction stands for the proposition that when a text lists a series of items, a general term included in the list should be understood to be limited to items of the same sort. For instance, if someone speaks of using "tacks, staples, screws, nails, rivets, and other things," the general term "other things" surely refers to other fasteners. Weakland v. Toledo Engineering Co., Inc., 656 N.W.2d 175, 178 & n.1 (Mich. 2003). Under the doctrine of ejusdem generis, when a statutory clause specifically describes several classes of things and then includes "other things," the word "other" is interpreted as meaning "other such like." People v. Davis, 199 Ill.2d 130, 138, 262 Ill. Dec. 721, 766 N.E.2d 641, 645 (2002). Applying the doctrine of ejusdem generis and strictly construing the container exemption, we determine a vehicle's glove compartment is not an "other container" under the container exemption. A glove compartment is fundamentally different from a case, firearm carrying box, or shipping box because those receptacles are portable whereas a glove compartment is a fixed area in the dashboard of a vehicle. Therefore, a glove compartment is not an "other container" similar to the ones enumerated in the container exemption. People v. Cameron, 784 N.E.2d 438 (Ill. App. 4 Dist., 2003). Ejusdem generis is a subcategory of noscitur a sociis. Omnia praesumuntur contra proferentem: Ambiguous terms must be construed against the drafter of the contract. Because the contract as a whole can be reasonably interpreted to support either Mead's or ABB Power's position regarding the scope of the indemnity clause, we conclude that the contract is ambiguous as to this issue. Under Ohio law, "[a]mbiguous contractual language will be construed against the drafter of the contract." Lelux v. Chernick, 119 Ohio App.3d 6, 694 N.E.2d 471, 473 (1997) 13